Full opinion text
OPINION PER CURIAM: This case was referred to Chief Trial Commissioner Marion T. Bennett with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 57 (a). The commissioner has done so in an opinion and report filed on June 23,1967. Plaintiff and defendant except in part to the commissioner’s opinion and findings and the case has been submitted to the court on oral argument of counsel and the briefs of the parties. Since the court agrees with the commissioner’s findings, opinion, and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Therefore, plaintiff is entitled to recover and judgment is entered for plaintiff with the amount of recovery to be determined pursuant to Rule 47(c). OPINION OF COMMISSIONER BENNETT, Chief Commissioner: This is a suit by the taxpayer for the recovery of excess profits taxes paid by taxpayer’s predecessor for the year 1950. The sole issue remaining for determination is defendant’s setoff of $67,309.02, arising by virtue of the defendant’s treating taxes paid by taxpayer in 1950 to the Republic of Mexico as a deduction from gross income under section 23(c) of the 1939 Internal Revenue Code, ch. 2, § 23(c), 53 Stat. 12, rather than as a foreign tax credit against the United States tax liability under section 131(a), 131 (b), or 131(h) of the Code, as amended, ch. 619, § 158, 56 Stat. 856. This issue presents two separate questions: (1) Whether the tax imposed by the Republic of Mexico is an income tax or a tax in lieu of an income tax within the meaning of section 131 of the 1939 Code so as to entitle taxpayer to a foreign tax credit, and (2) if the Mexican tax is either an income tax or a tax imposed in lieu of an income tax, what is the amount which taxpayer may take as a foreign tax credit for 1950? For reasons hereinafter shown, it is concluded that taxpayer is entitled to the foreign tax credit. The amount of the credit is determined in this opinion. Taxpayer is a common carrier by rail, and operates in interstate commerce subject to the jurisdiction of the Interstate Commerce Commission, hereinafter referred to as the I.C.C. One aspect of this commerce of particular relevance to this case is the freight car interchange system. Under this system, railroad cars owned by taxpayer were delivered, by interchange, to other railroads, for use by those other railroads on their lines. Under the equipment interchange rules established by the Association of American Railroads, the using railroads paid a daily rental to the taxpayer known as “per diem,” for the period during which the taxpayer’s cars were located on their lines. Similarly, when cars of another railroad, referred to as “foreign cars,” were located on the taxpayer’s lines, taxpayer was required to pay these railroads the per diem. The Mexican railroads also participated in this interchange system and subscribed to the interchange rules. Freight cars of the taxpayer were transported to the Mexican border, at which point the receiving Mexican railroad would hook on to them with one of its own locomotives and haul them away. In 1950, the per diem to taxpayer for its freight cars in Mexico was $2.05. Taxpayer’s reported income for the year from the rental of freight train cars to railroads in Mexico was $330,251, representing payment for 161,098 freight car days in Mexico at the stipulated rate of $2.05 per day. In 1950, taxpayer, in conjunction with Mexican railways, operated a passenger train service into Mexico. Taxpayer received from Mexican railroads a rental income of 10 cents for each mile each car was operated on the lines of railroads in Mexico, resulting in a total income for the year from this source of $47,510. Taxpayer operated 781 passenger car days in Mexico in 1950. Thus, the total income taxpayer received in 1950 from rental of freight and passenger cars to Mexico was $377,761. Taxpayer had no other commercial association with Mexico, since taxpayer had no operations in that country, owned no facilities there, and had no control over cars after an interchange with Mexican railroads until the cars were returned. The above-mentioned rental income from Mexican sources was subject to tax imposed by the Republic of Mexico pursuant to the provisions of the Mexican law entitled “Ley del Impuesto Sobre la Renta,” the translation of which is “Income Tax Law.” Pursuant to the provisions of the Mexican income tax law, taxpayer paid to the Republic of Mexico in 1950 a tax in the amount of $116,050 on the rental income received. In filing its federal income and excess profits tax return for the taxable year 1950, on a calendar-year basis and under the accrual method of accounting, taxpayer claimed and was allowed the full amount of the tax paid to Mexico as a foreign tax credit. Subsequently, the Commissioner of Internal Revenue, hereinafter referred to as the Commissioner, determined that taxpayer was liable for additional income and excess profits taxes in the amount of $203,239. The deficiencies were duly assessed and were paid by taxpayer on January 17, 1956. On November 16, 1956, taxpayer filed a timely claim for refund of $184,048 of excess profits taxes paid in 1950. That claim was amended on June 10, 1960, to claim the relief provided by section 94 of the Technical Amendments Act of 1958 (Pub.L. 85-866, 72 Stat. 1606, 1669 (1958)). In considering taxpayer’s claim for refund, the Commissioner disallowed as a foreign tax credit the $116,050 tax paid to Mexico and instead treated the tax as a deduction from gross income under section 23(c) of the Internal Revenue Code of 1939 and treated the barred deficiency resulting from that determination ($67,309) as an offset against taxpayer’s claim for relief under section 94 of the Technical Amendments Act. Following the institution of this suit, a taxpayer received a $116,-739 refund for the balance of its claim. Plaintiff now seeks to defeat the offset. I. Creditability op the Mexican Tax Sections 131(a) and 131(h) of the 1939 Code provide that United States taxpayers may credit against their United States tax liability amounts paid or accrued on account of foreign income taxes or taxes imposed in lieu of income taxes. The first prong of attack by the Commissioner’s setoff is his contention that the tax which the taxpayer paid to the Republic of Mexico was neither an income tax nor a tax imposed in lieu of an income tax within the meaning of section 131. Article 1 of Ley del Impuesto Sobre la Renta, hereinafter referred to as the Mexican income tax law, sets forth the general nature of the tax: The Income Tax is payable on profits, gains, rentals, products, benefits, participations and in general, on all amounts received in cash, in securities, in kind or in credit, which by reason of any of the items set forth in this Law, modify the taxpayer’s possessions. The rest of the Mexican statute goes on to establish a schedular tax system. It imposes a graduated tax on income and gains under five different schedules, each schedule having its own determination of taxable income and its own specific tax rates. Almost all economic activity or sources of income will fall within and be taxed under one of the five schedules. Schedules I and II are the only schedules relevant to the instant case. Schedule I is the general schedule covering business or commercial income. It subjects to tax those who “execute acts of commerce, or operate an agricultural or industrial business.” In general, all acts performed by a business entity in connection with its business are classified by the Mexican Commercial Code as acts of commerce, and therefore fall under schedule I unless specifically included elsewhere. The taxpayer’s car rental income was specifically included under schedule II, however, and this was the schedule under which the tax was imposed. Compared with schedule I, schedule II is a somewhat narrow and specific schedule, covering, inter alia, the following sources of income: ARTICLE 15. * * * XIII. — Rentals, premiums, royalties and returns of all kinds which the owners or possessors of movable property receive from persons to whom they have granted exploitation rights without transferring ownership. The concerns which lease or in any other manner grant the use or enjoyment of rolling stock to concerns which operate in the country, even though the contracts are made abroad * * * are specially considered as included under this Section. The tax imposed on taxpayer’s car rentals under schedule II was payable on the gross amount of the revenue, since schedule II makes no provision for deductions. This is the basis of the Commissioner’s contention that the tax was not an income tax. It is well settled that the question of whether the foreign tax is an income tax within the meaning of section 131(a) must be decided under criteria established by our own revenue laws and court decisions. Commissioner of Internal Revenue v. American Metal Co., 221 F.2d 134 (2d Cir. 1955), cert. denied, 350 U.S. 829, 76 S.Ct. 61, 100 L.Ed. 740; Biddle v. Commissioner of Internal Revenue, 302 U.S. 573, 58 S.Ct. 379, 82 L.Ed. 431 (1938). In other words, to be creditable under section 131(a), the foreign tax must be the substantial equivalent of an income tax as the term is understood in the United States. Lanman & Kemp-Barclay & Co. of Colombia, 26 T.C. 582 (1956); New York & Honduras Rosario Min. Co. v. Commissioner of Internal Revenue, 168 F.2d 745, 12 A.L.R.2d 355 (2d Cir. 1948); Keasbey & Mattison Co. v. Rothensies, 133 F.2d 894 (3d Cir. 1943), cert. denied, 320 U.S. 739, 64 S.Ct. 39, 88 L.Ed. 438. The Commissioner cites Keasbey & Mattison Co. v. Rothensies, supra, and other cases, for its assertion that in order to be considered an income tax, a tax must be measured by net income. St. Paul Fire & Marine Ins. Co. v. Reynolds, 44 F.Supp. 863 (D.Minn.1942), also lends some support for this proposition. For its part, the taxpayer cites several cases rejecting the theory that a tax levied on gross income cannot be credited as an income tax. Santa Eulalia Mining Co., 2 T.C. 241 (1943), petition to review dismissed, 142 F.2d 450 (9 Cir. 1944), involving a Mexican income tax statute which was a predecessor to the one m issue here; Seatrain Lines, Inc., 46 B.T.A. 1076 (1942). To the taxpayer, the allowance of deductions from gross income in computing the amount of tax due is a matter of legislative grace and should not affect the classification of a tax as an income tax. The significant point, plaintiff contends, is that both the United States and the Mexican statutes “are predicated upon the concept of deriving national revenues by imposing a direct tax upon income, gains or recurrent benefits (usually measured in money) which proceed from labor, business or property.” This is in contrast to taxes imposed upon sales, property, production, or the privilege of doing business or operating as a corporation. In other words, plaintiff taxpayer says the Mexican income tax law is an income tax in the sense that (1) it imposes tax on items which fall within the definition of gross income under the Internal Revenue Code of the United States and (2) it is not an excise or other nonincome type of tax, but a tax the sole purpose of which is to reach income. The taxpayer points specifically to sections 231(a) (1) and (c) of the 1939 Internal Revenue Code, now section 881 of the 1954 Code, as amended, as an example of a provision in the United States Internal Revenue Code comparable to the Mexican tax in question. Section 231 provides for a tax on the gross income from United States sources of nonresident foreign corporations and is nearly identical to a Philippines tax which the Internal Revenue Service ruled was creditable in Rev.Rul. 66-65, 1966-1 CUM.BULL. 175. The Commissioner disputes the comparison since the Mexican income tax law apparently applied to car rental income earned by residents as well as nonresidents. The taxpayer, of course, replies that the nature of the tax is not affected by the residence of the taxpayer against whom it is applied. Finally, there are some early Revenue rulings which deal with the characterization of predecessor Mexican tax statutes. Two of these rulings held that a tax on gross receipts in the form of interest or rents comes within the United States concept of an income tax, while at the same time either reserving judgment on other provisions of the applicable statute which imposes a tax on gross receipts from other sources, or actually holding such other provisions to be not within the United States concept of an income tax and, therefore, not creditable. I.T. 2620, XI-1 CUM.BULL. 44 (1932) ; I.T. 3385, 1940-1 CUM. BULL. 103. Thus, these rulings seem to place in a special category income from interest and rents, as if this type of increment from capital represents a classical flow of “income” which requires no deductions. A slightly later Revenue ruling, dealing with sources of income other than interest and rent, went even further, and in deference to the Santa Eulalia Mining Co. case, supra, revoked several old Revenue rulings holding that particular taxes imposed under the general Mexican income tax law of the period were not creditable because they wre imposed upon gross receipts. I.T. 3787, 1946-1 CUM.BULL. 232. Although over 20 years old, this Revenue ruling has not been revoked. However, despite the able presentation of the parties, it is unnecessary to resolve the issue of whether or not the Mexican income tax was an income tax under section 131(a), since the case is so clearly controlled by section 131(h) of the 1939 Code, as amended. That section provides that a tax which is imposed by a foreign country in lieu of an income tax otherwise generally imposed may be taken as a credit. The purpose of section 131(h), added to the Code by the Revenue Act of 1942, 56 Stat. 858, was to expand judicial interpretation in this area so as to allow a foreign tax credit for a foreign tax which, although not a tax on net income, was imposed as a substitute for a tax on net income. Motland v. United States, 192 F.Supp. 358 (N.D.Iowa 1961). Thus, the scope of the section was extended to cover the case where “a foreign country in imposing income taxation” authorized the payment of “a tax in lieu of such income tax but measured, for example, by gross income, gross sales * * *,” etc. S.Rep. No. 1631, 77th Cong., 2d Sess. 131 (1942-2 CUM. BULL. 504, 602). Treas.Reg. 111, § 29.131-2 (1939) spells out in detail what is required for a tax to be considered a tax in lieu of income taxes generally imposed by a foreign country: (1) That the country have in force a general income tax law; (2) that the taxpayer claiming the credit would, in the absence of a specific provision applicable to such taxpayer, be subject to such general income tax; and (3) that the general income tax is not imposed upon the taxpayer thus subject to such substituted tax. All three of the foregoing requirements are met in the instant case: (1) Schedule I of the Mexican income tax law is certainly a general income tax law of that country. I.T. 3945, 1949-1 CUM.BULL. 88. As mentioned above, this schedule covers generally all business transactions of commercial concerns, that is, of those engaged in commerce, industry,- or agriculture. The tax is imposed on net income only, since the deductions permitted under this schedule are very similar to the deductions allowed under the Internal Revenue Code of the United States. Article 6 states that the tax under schedule I “shall be payable on the difference resulting between the taxpayer’s revenue and the deductions authorized by the Regulations. These deductions shall comprise solely the ordinary and necessary expenses required for the purpose of the business.” Articles 39 and 40 of the Mexican regulations allow taxpayers under schedule I the following deductions, inter alia: Cost of goods sold, amortization, depreciation, rental expense, salary expense, interest, insurance premiums, local taxes, and charitable gifts. (2) Except for the specific provision relating to rolling stock contained in article 15, section XIII, under schedule II, quoted supra, taxpayer would have been subject to the general income tax under schedule I. In 1937, when the predecessor of section XIII, article 15, covered rentals from movable property, but did not specifically include railroad rolling stock, the Supreme Court of Mexico held that the rental income on rolling stock was not taxable under schedule II for the reason that rolling stock was classified under the new civil code of Mexico as being real property. In a later case in the same year the Court held that such income should be taxed under schedule I of the Mexican income tax law, applicable to commercial concerns doing business in Mexico. In January 1939 the Mexican income tax law was amended to provide specifically, as it did in 1950 in article 15, section XIII, that rental on railroad rolling stock would be taxed under schedule II. This background makes it clear that the tax imposed on taxpayer’s car rentals is intended by the Mexican Government as a substitute for the general income tax and is not merely an additional or unrelated tax. Defendant argues that taxpayer yrould not, in fact, have been subject to the general income tax under schedule I because taxpayer had no operations or facilities in Mexico in 1950. However, nothing in the statute indicates this requirement for the applicability of schedule I. One can “execute acts of commerce” without the physical presence of facilities. Article 2, which lists those persons subject to the Mexican income tax statute, does not distinguish between the various schedules: Article 2. — The following persons are subject to the Income Tax: * * II. — Foreigners domiciled in or outside of the Republic, when modification of their possessions is derived from sources of wealth located in the National Territory or from business transactions carried out therein. (3) It is conceded that the general income tax under schedule I was not imposed upon the taxpayer. A review of section 131(h) cases before this court reveals the court’s substantial agreement with the design of the requirements set forth by the above Treas.Reg. 111, § 29.131-2 (1939). In Prudential Ins. Co. of America v. United States, 319 F.2d 161, 162 Ct.Cl. 55 (1963) , the taxpayer insurance company paid a 2-percent tax imposed by the Dominion of Canada and two provinces on the insurance premiums collected during the year from Canadian policyholders. The court succinctly stated its reason for holding that the premium tax was a tax in lieu of an income tax: “ * * * plaintiff was excused from paying the Ontario tax calculated on the net income of corporations because it was an insurance company paying a premiums tax under another section of the same statute.” 319 F.2d at 164, 162 Ct.Cl. at 61. The court later reaffirmed its reasoning in three more. Canadian insurance cases with similar facts. In a second Prudential case, the court disposed of the case under the rule of stare decisis. Prudential Ins. Co. of America v. United States, 337 F.2d 651, 167 Ct.Cl. 598 (1964). In Equitable Life Assur. Soc’y of the United States v. United States, 366 F.2d 967, 177 Ct.Cl. 55 (1966), the court held that “both the Dominion and the provinces decided to impose or retain the premiums taxes because these insurance companies were not being asked to pay income taxes * * *. For the purposes of the Internal Revenue Code’s foreign tax credit, that is enough to characterize the premiums taxes as imposed ‘in lieu of’ income taxes.” 366 F.2d at 974, 177 Ct.Cl. at 68-69. In the most recent case of this kind, Metropolitan Life Ins. Co. v. United States, 375 F.2d 835, 179 Ct.Cl. 606 (1967), the Government contended that Congress intended the “in lieu” part of the foreign tax credit to apply only to so-called “empirical” income taxes— “those clearly seeking to levy solely on net income but using a simplified or convenient formula or method for calculating such profit in order to avoid the administrative difficulties of ascertaining a non-resident’s net income within the country.” 375 F.2d at 837, 179 Ct.Cl. at 609. The court rejected this interpretation of statutory history. Reviewing the history, the court said the excerpts in the Senate report referring to the administrative difficulties in calculating a nonresident’s net income were merely examples intended to illustrate the need for expanding the foreign tax credit. The primary consideration was the avoidance of double taxation of the earnings of American companies in foreign countries. Thus, the court concluded that a foreign tax may qualify for the credit if it was imposed not because of administrative or computational difficulties, but because, as was true for the Canadian premiums taxes, it was considered bad policy or inconsistent with the country’s legal theory to levy the normal income tax upon a particular class of company. The tax is creditable so long as it “was levied by the foreign country in place of or instead of or as a substitute for some existing income or profits tax,” regardless of the “reason the other country might consider it proper to substitute the ‘in lieu’ levy in the special case for the ordinary income tax generally imposed.” 375 F.2d at 838-839, 179 Ct.Cl. at 610, 612. Similarly, this court held in Compania Embotelladora Coca-Cola, S.A. v. United States, 139 F.Supp. 953, 134 Ct.Cl. 723 (1956), that a Cuban production tax was a tax in lieu of an income tax, because a specific provision in the general income tax law exempted payers of the production tax from paying the income tax. Thus, in all these cases, the determining question is whether the tax in question was imposed as a substitute for, instead of, or in place of, and otherwise generally imposed income tax to which the taxpayer would otherwise be subject. For the reasons explained above, the tax imposed on taxpayer’s car rental income clearly meets this test. II. Amount of the Foreign Tax Credit Once it has been determined that the Mexican tax imposed on taxpayer’s Mexican car rentals is a tax in lieu of an income tax, it becomes necessary to compute the credit to which taxpayer is entitled. Section 131(b) (1) imposes a limitation upon the amount of the credit which can be taken for creditable foreign taxes. This is designed to prevent the tax credit from reducing or eliminating the United States tax on income from sources within the United States. Under this section the maximum amount of the credit is a figure which bears the same relation to the total United States tax against which the credit is taken as the normal-tax net income derived from sources within the foreign country bears to the taxpayer’s entire normal-tax net income. Thus, the maximum amount of the credit may be determined by use of the following formula: Normal tax net income from Mexico Total normal tax net income U. S. tax before adjustment in issue Since all the other factors in the formula are known, the only problem before the court is to determine taxpayer’s taxable income from Mexico. Since the gross income the taxpayer earned from Mexican sources is known, what really remains to be determined is the amount of expenses which the taxpayer incurred in earning the Mexican income. Of course, we are concerned only with expenses which constitute deductions from the gross income, since we are trying to determine taxpayer’s taxable income in Mexico, using standard United States tax accounting concepts. Therefore, it might be more accurate to define the problem as one of determining what part of taxpayer’s total deductions is properly allocable to the Mexican gross income. For guidance section 131(e) of the 1939 Code provides that the amount of (taxable) income from sources without the United States shall be determined in accordance with the provisions of section 119. Section 119 (d) in turn provides as follows: (d) Net Income from Sources Without United States. — From the items of gross * * * [foreign income] there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto, and a ratable part of any expenses, losses, or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be treated in full as net income from sources without the United States. Restating the statutory mandate in terms of the instant case, if an expense or other deduction, or some part thereof, can be definitely assigned to gross income earned in either the United States or Mexico, then it should be so assigned and no proration is necessary. De Nederlandsche Bank, 35 B.T.A. 53 (1936) (decided under a statutory provision involving the other side of the coin — i. e., the determination of a foreign corporation’s taxable income within the United States.) Those deductions which cannot reasonably be directly assigned to one country or the other should be allocated ratably between the two. International Standard Elec. Corp. v. Commissioner of Internal Revenue, 144 F.2d 487 (2d Cir. 1944), cert. denied, 323 U.S. 803, 65 S.Ct. 560, 89 L.Ed. 640 (ratably allocating to foreign countries part of the general or overhead expenses of a domestic holding company which received dividend income from foreign subsidiaries in those countries). Since determining net taxable income in Mexico is our first objective for purposes of this case, we are really not concerned with those deductible expenses which are assignable directly to the United States. Rather, we are concerned only with the following two classes of deductible expenses: (1) Those which are directly assignable to Mexico because they are directly attributable to and incurred in earning the rental income in Mexico; and (2) the Mexican portion of expenses which are not directly assignable to the income from either country and must, therefore, be allocated ratably between the two countries. Expert witnesses for both parties prepared studies to determine the amount of such expenses. Both studies adopted the same general two-step approach: (1) Listing for the year all the taxpayer’s expenses which were related to the ownership and maintenance of its car fleet; and (2) analyzing those expenses to determine which of them were incurred as a result of cars being used to earn income in Mexico. From the foregoing, one can observe that the effect of not including an expense in the category of ownership and maintenance expenses will be to assign that expense directly against United States income in the first place. This is theoretically sound since the taxpayer has no facilities and no operations of any kind in Mexico, apart from the rental of its cars. Thus, it is felt that any expense completely unrelated to the ownership and maintenance of railroad cars is, by necessity, unrelated to earning car rental income in Mexico. In other words, since such expenses must relate solely to United States operations, they are assigned there initially by not even including them in the expert studies for our consideration. Once an expense passes the first test and is included in the category of ownership and maintenance expense, its final disposition still remains to be determined — i. e., should it be (1) directly assigned (in whole or in part) against United States income, or (2) directly assigned against Mexican income, or (3) allocated between the two on some pro rata basis ? Once it has been determined that an expense should properly be allocated on a pro rata basis, as opposed to directly assigned, the parties are agreed that the proper method for so allocating expenses between the two countries is by use of a “car-day divisor.” The following section on passenger coach expenses illustrates the operation of this approach in determining the portion of taxpayer’s expenses incurred in earning income from the rental of passenger coaches to Mexican railroads. A. Passenger Coach Expenses Taxpayer’s total 1950 passenger coach ownership and maintenance costs were $1,863,929 and consisted of the following elements of cost: Item of Expense Amount 1. Passenger train car repairs applicable to coaches......$1,212,991 2. Coach repair portion of maintenance of equipment overhead .............. 112,322 3. Coach portion of equipment repair facilities expenses ... 107,319 4. Coach portion of general expenses................... 44,684 5. Coach portion of interest........................... 23,982 6. Property taxes applicable to coaches................. 76,760 7. Payroll taxes applicable to coaches.................... 56,855 8. Depreciation applicable to coaches....... ........... 229,016 Total coach ownership expense — 1950 ............ 1,863,929 None of the above expenses should be directly applied against either United States or Mexican income, but rather the total amount should be allocated between the two countries on the basis of car days. The number of total potential passenger train coach days for 1950 is 54,385, derived by multiplying the simple average number of coaches owned by taxpayer during 1950 (149) by 365 days. From this total, the unserviceable car days of coaches (3,046) is subtracted to arrive at 51,339, the total potential serviceable car days of coaches. The total passenger coach ownership and maintenance cost of $1,863,929 is then divided by the above potential coach days of 51,339 to determine the cost per day of coach ownership and maintenance. Thus, for 1950, the cost of ownership and maintenance per coach day was $36.31. The cost per coach day figure is then multiplied by the number of coach days in Mexico (781), resulting in the total figure of $28,358.11, which represents the expenses which the taxpayer incurred in earning income from the rental of passenger coaches to Mexican railroads. With two exceptions, items 5 and 6, the parties are agreed that the above items of passenger coach ownership and maintenance expenses are correct and that all of them should be allocated between the United States and Mexico on a car-day basis. The two disputed items relate to interest and property taxes. The following sections explain the reasons for the conclusions reached on these items. Property Taxes. State property taxes on railroad cars, like property taxes in general, are assessed on the basis of value. In order to solve the special problem created by the rolling characteristic of railroad cars, property taxes are based upon a proration of the value of the cars to the several states in which a railroad operates on the basis of miles of road a railroad has in each state. The defendant’s expert assigned a portion of state property taxes and other miscellaneous taxes to the cost of passenger coach ownership, and allocated such amount between the two countries on a car-day basis. The taxpayer contends that since such taxes are incurred only in the states in which the taxpayer owns and operates railroad lines, no such taxes are properly allocable to earning Mexican income because no tax is incurred in Mexico by reason of the presence of taxpayer’s cars in Mexico. The taxpayer’s contention must be rejected. It is true that taxpayer incurs no additional property taxes because of its car rentals in Mexico. Its property taxes would have been the same even if none of its cars had ever gone into Mexico. But this is also true of interest, depreciation, and other types of car ownership expense. For example, taxpayer paid interest only to American banks and incurred no interest charges specifically because of the presence of coaches in Mexico. But this does not mean, and taxpayer does not contend, that the total amount of interest charges attributable to coaches should be allocated to United States operation. It simply means that such owenrship expenses as property taxes are in the statutory category of expenses which cannot be specifically identified with the income from either country, and therefore, must be allocated ratably (by car days). The reverse side of the taxpayer’s coin is just as true — the amount of property taxes is not reduced by virtue of the presence of taxpayer’s cars in Mexico and their absence from the United States. Thus, the taxes are not assessed on the basis of United States operation alone, but rather are assessed on the basis of taxpayer’s overall United States and Mexico operation. The taxpayer would be correct if the method for assessing state property taxes made allowance for the fact that sometimes cars are not in any state and therefore divided less than 100 percent of the value of all cars among the states where lines exist. But, the f^ct is that property taxes are assessed against all passenger coaches, and not just against coaches operating in the United States. Thus, such taxes are overall ownership expenses which must be prorated against both Mexican and United States income. Defendant’s evidence which employs the above approach, has been adopted for the purpose of determining the amount of property taxes applicable to passenger coaches. Interest. Railroad cars are purchased through a down payment of 20 to 25 percent and the issuance of equipment trust certificates and conditional sales agreements for the balance. The taxpayer fixed the amount of interest charges on passenger coaches by simply computing the actual interest charges paid on outstanding equipment trust certificates and conditional sales agreements covering such coaches. Defendant disputes taxpayer’s approach on two grounds. First, it contends that the 20- to 25-percent down payment must have come from the proceeds of general mortgage or other non-equipment bond issuances and that, therefore, an approach should be adopted which takes into account more than just the interest on the trust certificates and sales agreements. The taxpayer replies, however, that the down payment does not come from general mortgage funds, because such funds are invested entirely in roadway property and do not cover equipment transactions. Taxpayer claims that the source of the down payment was current or accumulated earnings. The record supports the taxayer on this point. The last bond issuance of taxpayer was a very minor one in 1933. The great majority of Missouri Pacific bonds were issued prior to 1930. Certainly the taxpayer has acquired new railroad cars, including coaches, since then. Thus, the cars acquired since the 1930’s were acquired without the benefit of proceeds from bond issuance. For at least 20 years prior to the taxable year in question, taxpayer financed the down payment on equipment purchases from sources other than bond issuance. The defendant’s second objection to taxpayer’s method of computing the interest costs relating to the ownership of coaches is more sweeping than its first. It contends that taxpayer is attempting to isolate a portion of its operation and fails to recognize that the debts incurred in acquiring railroad cars must bear some relationship to the overall debt structure. One must look at the entire debt structure, says the defendant, since the taxpayer is not in the car renting business, but is in the railroad business. The entire debt is thus claimed to be a general cost of doing business, and a portion of that debt is reasonably chargeable to passenger coaches. Therefore, the defendant determined the interest costs chargeable to the ownership of passenger coaches by computing the ratio of taxpayer’s investment in passenger coaches to its total investment in all tangible assets, and multiplied that ratio by the total interest costs for the year. The problem with the defendant’s method is that it ignores the statutory mandate of section 119(d) of the 1939 Internal Revenue Code. The use of the convenient short-cut process of dealing with expenses in terms of the ownership and maintenance of railroad cars, as discussed supra, should not distract us from the method of allocation established by the statute. What the defendant is really saying is that none of the interest expenses are directly identifiable with or attributable to the income earned in either the United States or Mexico. On the other hand, the taxpayer is saying that all interest costs, other than those paid on the equipment trust certificates which financed the passenger coaches, are directly assignable to the United States. The taxpayer is correct in this. The general mortgage funds went to finance road equipment in the United States, which properly contributes to the earning of United States income only. The only interest expense which contributes to activity which earns Mexican income is interest which finances railroad cars, since some cars are rented to Mexico. It is impossible to comprehend how any of the interest cost on money borrowed to finance a line of track in Texas, for example, has any relationship to the earning of Mexican income. The defendant’s method has two distorting effects. By lumping all interest costs together, it applies an average rate on funded debt to railroad coach acquisitions. But, in fact, as defendant’s expert witness admits, the interest rate on railroad cars is much lower than the interest rate on road property. Why should the railroad cars, and thus ultimately Mexican income, be charged with the higher interest rate required to finance United States operations? The direct, exact, and clearly identifiable cost of railroad car financing is known, and it should be used. A second distortion in the defendant’s method results from the fact that about one-third of the equipment obligations are paid off. Thus, the defendant is allocating a portion of general mortgage interest to cars which have paid their full interest costs in a tax sense. In the world of finance and economics, the defendant’s approach has merit. All interest is theoretically interchangeable and all assets bear a certain imputed interest cost, since the assets could be sold and the proceeds invested at interest. But, in computing taxable income (in the United States and in Mexico) established tax accounting techniques must be used. The tax law has never recognized imputed expenses in determining taxable income. The defendant’s theory would lead to the logical conclusion that railroad cars bear a certain interest expense even if all debt had been paid off, including debt on roadway property. Likewise, the defendant’s theory would lead to the same conclusion if, to take an unlikely hypothesis, a car manufacturer sold the taxpayer railroad cars under noninterestbearing conditional sales agreements. But, the effect would be similar to the taxpayer’s present circumstances. Approximately one-third of the cars were incurring no interest expense in 1950. The Code allows as a deduction only “interest paid or accrued within the taxable year on indebtedness,” and for some of these cars in 1950 no amount was paid or accrued on account on indebtedness. A final analogy can be made in the area of depreciation, where the tax concepts also often depart from economic concepts. If a substantial portion of these cars was fully depreciated for tax purposes, though still running and earning income in the United States and Mexico, depreciation on the said cars would have to be ignored in computing taxable income, and one could not impute to those cars a portion of the depreciation on other property. In summation, the taxpayer’s method of determining the interest expense attributable to passenger coaches is adopted, i. e., inclusion of interest on equipment obligations alone, since the interest on car financing ceases to exist when these obligations are paid, and the interest on road property in the United States has no relation to Mexican income. The interest attributable to coaches, like the rest of the coach ownership and maintenance items, was allocated between the two countries on the basis of car days, as explained above. B. Freight Car Expenses There is much less agreement in the parties’ expert studies of freight car ownership and maintenance expenses. The parties disagree both as to the inclusion of certain amounts in the category of ownership and maintenance, and as to the ultimate allocation or assignment of various items within the category. The main difference in approaches stems from the taxpayer’s much more detailed study. For example, instead of determining the total amount of freight car maintenance expenses and allocating that total between the two countries on the basis of freight car days (as was done for passenger coach maintenance expenses), the taxpayer broke down direct maintenance expenses, i. e., freight car repairs, into three separate categories of repairs. One category it allocated by car days, another was allocated on the basis of where the repair was incurred, and the third was assigned completely to the United States. The taxpayer followed this approach through in its treatment of indirect freight car maintenance expenses (various overhead or general expenses) allocable to freight car repairs. This opinion will use the taxpayer’s approach as a point of departure in its analysis. On issues where the taxpayer is correct, the greater detail of its study adds a greater degree of precision. Where taxpayer is incorrect, the greater detail is still valuable in that it more clearly defines the issues. Both parties use as a starting point the total amount of taxpayer’s account 31.4, “Freight Train Car Repairs,” in its 1950 annual report to the I. C. C. Thus, the issues are actually presented in terms of what are the proper adjustments to this figure, in order to determine ownership and maintenance expenses. The disputes over particular items are resolved in general terms in the findings which follow. Finding 54 contains a summary which gives in dollar amounts the results of the findings and conclusions made here. Direct Freight Car Maintenance Repairs. The records kept by taxpayer in 1950 indicate that it divided its freight car repairs into three classifications: (1) Classified repairs, (2) running repairs, and (3) user repairs. Classified Repairs. Classified repairs are normally made in one of the three major repair shops of taxpayer and involve all body work over $50. A great percentage of classified repairs is programmed or scheduled and, on the average, a car receives a classified repair every 5 or 6 years. Under the interchange rules, classified repairs are made only by the owning railroads, and not by user railroads operating foreign cars on their lines. Since the operation of freight cars in Mexico, as well as in the United States, contributed to the classified repairs expenses, these expenses should be allocated between the two countries on the basis of car days. On this item there is no dispute between the parties. Classified repairs cannot be definitely assigned to the income of either country, since they pertain to the entire operation of taxpayer. Running Repairs. Running repairs are repairs which are made either in trainyards or on tracks, commonly called rip tracks, where relatively minor adjustments and repairs are made. Running repairs consist primarily of work not involving the body of the car at all, such as repairs concerning the wheels, axles, springs, and braking system, although running repairs occasionally include work on the body which is under $50. Such repairs are often unscheduled. A railroad makes running repairs to foreign cars on its lines as well as to its own cars, but these repairs are considered the owner’s responsibility and the using railroad bills the owning railroad for such repairs at rates established under the interchange rules. The defendant did not distinguish between running repairs and classified repairs, but included running repairs in total repair expenses to be ratably allocated. The taxpayer, on the other hand, assigned running repairs on an actually incurred basis. If the repair took place in Mexico, the expense was assigned to Mexico, and if the repair was performed in the United States, the expense was assigned here. The defendant, in turn, contends that there is no justification for segregating car ownership costs on the basis of the fortuitous circumstance of the location at which such repairs were made, and that allocating the total cost on a car-day basis is more accurate. The two approaches lead to considerably different results because, as will be discussed shortly, the taxpayer actually spends less on running repairs per car day in Mexico than it does in the United States. Thus, the car-day allocation method results in a greater allocation of expenses to Mexico, since it lumps all running repairs together and assigns the average expense per car day to Mexico. In effect, the taxpayer is claiming that the expenses of running repairs in Mexico are expenses which, under the direction of section 119(d), are properly assignable directly to Mexico. Whether this is so depends upon whether those expenses accurately reflect the true cost of running repairs in Mexico. After all, what the taxpayer is referring to as the expenses of running repairs in Mexico is merely the sum of the bills paid to the Mexican railroads for repairs performed there. If the taxpayer had no cars in use in Mexico at all, but merely delivered a portion of its cars there for repairs, it is obvious that the bills for repairs performed there would not reflect the true cost of its Mexican car-use, which is zero. Looking at the total running repair expenses, the true cost of taxpayer’s Mexican use is controlled by two factors: (1) The contribution the Mexican use made to the necessity for repairs, i. e., the wear and tear taxpayer’s cars incurred in Mexico; and (2) differences in the price of repairs in each country. This is elaborated in the following analysis: Looking just at the bills paid, that is, at the amount of money spent, the record reveals that the taxpayer spent approximately 64 cents per car day for running repairs on its own cars on its own lines. The Mexican railroads spent only 8.67 cents per car day on running repairs to taxpayer’s cars, or at least that is the amount for which the taxpayer was billed. If this disparity results from the fact that it truly costs less to run taxpayer’s car for a day in Mexico than in the United States, then a proper matching of (Mexican) income and expenses requires that the repairs billed in Mexico be directly assigned to Mexican income. This is in accordance with the concept of an expense properly assignable to foreign gross income under the statute. Known differences in cost should not be submerged into averages. This is why interest on equipment obligations, which bore a lower interest rate, was kept separate from other bonded indebtedness covering United States property. The taxpayer, of course, does claim an actual lower cost per day of running repairs in Mexico. Lower Mexican cost could only result from two factors: (1) Mexican railroads charge less for a given repair than the same repair would cost the taxpayer at home, or (2) less repairs are necessary in Mexico. The taxpayer does not claim the Mexican rates are lower than its own, since rates charged for running repairs are set by the interchange rules and represent the average cost of such repairs in the United States. The taxpayer does claim, however, that the use to which the cars are put in Mexico and the particular type of service they render there, necessitate less repairs. In other words, service on its own lines is supposed to be “harder service” than service on Mexican lines. However, except for the bare statement to this effect by taxpayer’s expert witness, there is no evidence whatever of this fact in the record. The taxpayer does not give us one example of how service in the two countries differs, or why Mexican service should be any easier on cars. The taxpayer’s own expert witness admitted that there is no particular reason why a mile in Mexico should be treated differently than a mile in Colorado. And there is nothing in the record to indicate that more miles are run in a car day in the United States than in Mexico. The defendant’s explanation for the difference in the amount spent on running repairs in each country is more logical and better supported by the credible evidence. The difference results from a conscious policy on the part of the railroad industry to spend more to repair its cars on-line so that the fleet would be in such a condition that there would be less necessity for repairs offline. In other words, where possible the taxpayer sought to repair its cars at home rather than have them repaired in Mexico. Also, a railroad tends to be more diligent in searching for and repairing defects of a nondangerous nature in its own cars than in the cars of another railroad on its line, since it is more concerned with the condition of its own fleet. Thus, there are no lower costs connected with the operation of taxpayer’s cars in Mexico. The taxpayer is just seeing to it that more of the repairs (including a portion of the repairs necessitated by wear and tear in Mexico) are performed in the United States than in Mexico. The fact that the disparity in the amount spent for running repairs does not exist only between taxpayer’s on-line repairs and Mexican repairs, tends to bear out this contention. At the same time that taxpayer was spending 64 cents per car day for running repairs on its own cars on-line, it was spending only about 27 cents per car day for running repairs to foreign cars on its lines. Also, in contrast to the 64 cents taxpayer spent for running repairs on its own cars, is the approximately 27.1 cents per car day that other United States railroads spent on running repairs to taxpayer’s cars while on their lines. As plaintiff admitted on page 27 of its reply brief to the trial commissioner: Plaintiff’s study showed that plaintiff spent a greater amount for running repairs to its cars on its own line than for such repairs to its cars on foreign lines and for repairs to foreign cars on line. This procedure is generally followed throughout the railroad industry as owner lines are primarily responsible for the operating condition of their cars. [Citations omitted.] The interchange rules also tend to support the idea that repairs should be made at home whenever possible. Rule 1(B) of the 1948 edition of the Code of Interchange Rules of the Association of American Railroads reads as follows: Repairs should be made by the car owner, insofar as may be practicable. In event a foreign car requires repairs on account of owner’s defects, such repairs may be made subject to the following conditions: 1. Repairs to loaded cars 'must be confined to the minimum necessary for the safety of car, lading and trainmen. The above analysis completely destroys the assumption that must be made and the condition that must exist if direct assignment of the running repair expenses is to reflect accurately the true cost involved. That assumption and condition is that the frequency of running repairs is such that they are made where the wear and tear or other defect was actually incurred. As to any particular car, the above would be true only by chance. But, given a large enough fleet of cars and assuming, as seems reasonable to a degree, that the frequency of running repairs varies with the use given the car, the above would be true as long as (1) taxpayer’s cars are inspected as frequently in Mexico for running repairs as they are online in the United States, and (2) the standards concerning when a repair is to be made are applied equally. As pointed out above, these conditions are not met. Given a car in the same condition, a repair might be made in the United States that would not be made in Mexico. But, the taxpayer contends that running repairs are performed on an emergency basis, out of operating necessity and safety, and thus may not be deferred. Yet the taxpayer contradicts itself on page 30 of its reply brief to the commissioner, where it admits “railroads permit minor repairs which do not affect the safety of the car, the lading, or trainmen to accumulate.” The defendant is not contending that defects are allowed to accumulate to the danger point in Mexico. Defendant is merely pointing out that the taxpayer might make a running repair to its own car long before safety considerations absolutely necessitated it, in order to preclude its being done by another railroad. A Mexican railroad, seeing the taxpayer’s car in the same condition, would be inclined to let it go, since it was not yet a safety hazard. A railroad prefers to spend its time and facilities keeping its own cars in good condition. The taxpayer’s point is perhaps well taken that the car-day method of allocation assumes that all cars travel the same number of miles within a given period, regardless of where used, and that the various uses to which various cars are put do not result in any differences in wear and tear experienced. But, the taxpayer has not demonstrated any departures from this assumption that would explain the fact that taxpayer spent over seven times as much per car day for running repairs in the United States as in Mexico. Taxpayer’s criticism of that assumption would also apply to some extent to classified repairs, but taxpayer agreed that they should be allocated by car days. The fact remains that the assumption behind defendant’s method is much more reasonable than the assumption one must make to use the taxpayer’s method, and until a precise time/use and mileage breakdown of the cause of repairs is made, a choice is forced between the two assumptions and the methods to which they lead. In summation, the evidence does not establish that the nature of a daily run in Mexico was easier on the cars and therefore resulted in less need for running repairs. Rather, from all that appears in the record, a Mexican car day contributed equally with a United States car day to the need for running repairs, but the taxpayer endeavored to see that the repair occurred on-line in the United States rather than in Mexico. Therefore, to reflect accurately the true cost incurred in each country, running repairs should be allocated between the two countries on the basis of car days rather than be assigned directly to the country where the repairs took place. User Repairs. User repairs are repairs of damage occurring because of unfair usage or improper protection by the using railroad, that is, repairs which are not due to normal wear and tear. Under the interchange rules, user repairs to foreign cars cannot be billed to the owner but must be borne by the using road. The parties are agreed that any user repairs to the taxpayer’s cars should be assigned directly against United States income. If any such repair was done to one of taxpayer’s cars in Mexico, it was, of course, not an expense of the taxpayer, since the Mexican railroad bore the expense. All such repairs done in the United States resulted from a particular use or misuse to which the car was put while earning United States income for the taxpayer. The taxpayer also assigned directly to United States income, user repairs which the taxpayer made to foreign cars, while the defendant allocated such amount rat-ably by car days to both countries. The taxpayer’s method is correct, since the reason for assigning such repairs to the United States applies identically to foreign cars. Just as the taxpayer, as an owner of cars, incurred this expense while earning exclusively United States income, so the taxpayer, as a renter or lessee of cars, incurred this expense while earning exclusively United States income. The fact that the cars repaired belonged to another railroad does not detract from their assignability to United States income. In fact, it only emphasizes that the expenses incurred were not ownership or maintenance expenses at all, but operating expenses relating solely to United States operations. Inspection. The parties disagree as to whether the cost of freight car inspection at terminal and junction points should be included in the class of freight car expenses to be allocated between the two countries. There are two basic types of car inspection expenses. One is an inspection expense in connection with running and classified repairs to determine what the repair was and whether it was properly made. This expense is treated by both parties as part of the repair expenses. The inspection expense with which we are concerned relates to the inspection of freight cars at all terminal and junction points, including charges on account of coupling air hose and testing air. Inspection at terminal and junction points serves at least two purposes. In connection with the interchange system, such inspections at the time of interchange determine who is responsible for the condition of the car. Secondly, and most important, before a car leaves a yard or terminal to begin a run, it is inspected to see whether it is in safe and proper condition for continued movement. Inspection at terminal and junction points is performed on foreign and privately owned cars as well as on system cars. The Code of Interchange Rules provides that such inspection costs are not billable to the owning railroad, but must be absorbed by the using road. The taxpayer did not include in its cost of car ownership and maintenance any of the inspection expenses at terminal and junction points. This, of course, had the effect of assigning the whole amount to United States income. The taxpayer reasoned as follows: Such inspection expenses are directly attributable to the use and operation of the car; they add nothing to the investment in or value of a car, are not expenses of car ownership or maintenance, but are operating expenses borne by the user; the taxpayer is not a user of cars in Mexico, no user repair costs are incurred by taxpayer in Mexico, and therefore, none are assignable to earning income in that country. The defendant contends that some of such inspection expenses are ownership expenses since the only way to find and program repairs is to inspect the cars. Therefore, says defendant, such inspection costs are just as much ownership expenses as the repair expenses are, and must be ratably allocated. However, the defendant did eliminate 40 percent of these inspection expenses as “assignable to private car inspection and transportation cost element of railroad owned freight car inspection.” Even if defendant were right that some portion of terminal and junction inspection should be included as an ownership or maintenance expense, its computations must be rejected. The only expenses which can possibly be considered as expenses of car ownership or maintenance are expenses which relate to the taxpayer’s own cars. The defendant recognized this by eliminating from terminal inspection a portion of such expenses attributable to the inspection of privately owned railroad cars. But, the defendant neglected to eliminate the expenses attributable to the inspection of foreign cars (cars owned by other railroads). Foreign railroad cars and privately owned cars spent a total of 9,391,088 active car days on taxpayer’s lines. Taxpayer’s own cars spent only 4,567,204 active car days on-line. Thus taxpayer’s own cars accounted for less than one-third of the total of 13,958,292 active car days on taxpayer’s lines. From this it is reasonable to assume that the greater part of the terminal inspection expenses were incurred by taxpayer on foreign cars. In this regard it should be noted that the Association of American Railroads has a different standard for the inspection of foreign cars than it does for the repair of foreign cars. Rule 1 (A) of the 1948 edition of the Code of Interchange Rules reads as follows: Each railroad is re